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Iron Ore Miners: Broker Views

Australia | Dec 07 2021

This story features MOUNT GIBSON IRON LIMITED, and other companies. For more info SHARE ANALYSIS: MGX

Despite recent iron ore price falls eroding near term upside for iron ore miners, some brokers remain buoyant on the medium-term outlook.

-Ord Minnett lowers its iron ore price forecasts
-Which iron ore miner has the largest downside risk?
-Macquarie’s preferred large and mid-cap exposures
-Ratings downgrade for two iron ore majors
-Vale reduces 2021 and 2022 production guidance

Mark Woodruff

Recent quarterly figures provide a neat summary of recent woes that have beset iron ore pricing. 

The 2021 June quarter iron ore price averaged US$200/t, falling to US$108/t in the September, quarter and Macquarie now forecasts an average price of US$100/t for the December quarter.

Looking further out, Ord Minnett has lowered its iron ore price forecasts by -12% to US$92/t in 2022, and by -10% to US$90/t in FY23. This comes as China steel output fell -23% year-on-year in October, with the tonnes-per-annum rate the lowest since December 2017. 

However, the broker expects momentum should improve as policy easing in China kicks in, despite an oversupply of iron ore in 2022. State media last week quoted Premier Li Keqiang as saying China will “cut reserve requirement ratios in a timely way to step up support for the real economy.” [Which it did yesterday – Ed]

The effect of falling prices upon the iron ore miners

The iron ore price falls have eroded the prior earnings upside for iron ore miners, according to Macquarie. Now, all iron ore stocks covered by the broker have estimated earnings downside in FY22, with Mount Gibson Iron ((MGX)) thought to have the biggest downside risk.

Despite the fall in iron ore price, the broker remains positive on iron ore miners generally, as they are still generating reasonable free cash flow. For large-cap exposure, BHP Group ((BHP)) is preferred over Rio Tinto ((RIO)) and Fortescue Metals Group ((FMG)), as the company's earnings potential turns positive in FY23 and FY24. Moreover, the portfolio of assets are expected to benefit from exposure to coal and copper. 

Mineral Resources ((MIN)) and Champion Iron ((CIA)) are Macquarie’s key mid-cap picks, as they offer unique leverage to both the iron ore price and the capital expenditure cycle. 

However, should the wild swings in the iron ore price be wearing thin upon any investors, the broker points out Deterra Royalties ((DRR)) offers low volatility exposure to iron ore via its royalty derived from BHP’s production at Mining Area C.

Macquarie has an Outperform rating for all of the above-mentioned iron ore stocks.

Meanwhile, after lowering its iron ore price forecasts, Ord Minnett reduces its rating for Rio Tinto to Hold from Buy. It’s thought continuing operational challenges may prompt marginal investors to prefer other stocks in the sector. The broker also decreases its target price to $102 from $113.

Ord Minnett also lowers its target price for Fortescue Metals Group to $20 from $22 and downgrades to Hold from Buy, given the company is trading near the broker's net present value estimate. Currently the broker is under research restriction for BHP Group.

Ord Minnett cuts its target price for Mineral Resources $40 from $47. A Hold rating is retained, despite the company holding the dubious distinction of the most expensive iron ore stock under Ord Minnett's coverage. 

Lower production by Vale

Brazilian heavyweight Vale recently lowered its 2021 and 2022 production guidance. 

The -2% lower guidance for 2021 wasn’t unexpected by Macquarie, as the broker had previously warned the company needed to ramp-up its run-rate in the December quarter to achieve its previous production guidance. 

Morgan Stanley feels lower 2022 production by Vale will likely be supportive of iron ore producers. The lower production level will help balance out the analyst’s existing surplus forecast for iron ore in 2022.

The broker highlights comments by Vale’s management of its intention to mainly withhold low-grade supply, in order to not oversupply the market with ore.

Currently, Morgan Stanley has an Equal-weight rating and $101 target price for Rio Tinto, while Fortescue Metals Group is allocated an Underweight rating with an $11.95 target price. The broker is currently under research restriction for BHP Group.

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CHARTS

BHP CIA DRR FMG MGX MIN RIO

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: CIA - CHAMPION IRON LIMITED

For more info SHARE ANALYSIS: DRR - DETERRA ROYALTIES LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: MGX - MOUNT GIBSON IRON LIMITED

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED